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Question: In answering these questions, assume that you are the credit manager of a medium-size toy manufac...

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In answering these questions, assume that you are the credit manager of a medium-size toy manufacturer. (Your company’s annual sales are about $2 billion per year.) Toys “R” Us wants to make credit purchases from your company of approximately $15 million per month, with payment due in 60 days.

4. Comment upon the company’s current ratio and quick ratio in relation to any “rules of thumb”.

5. Other than the ability of Toys “R” Us to pay for its purchases, do you see any major considerations which should enter into your company’s decision? Explain

6. Your company assigns each customer one of the four credit ratings listed below. Assign a credit rating to Toys “R” Us and write a memorandum explaining your decision. (In your memorandum, you may refer to any of your computations or observations in part 1 through 4, and to any information contained in the annual report.)

Possible Credit Ratings:

- Outstanding Little or no risk of inability to pay. For customers in this category, we fill any reasonable order without imposing a credit limit. The customer’s credit is reevaluated annually.

- Good Customer has good debt paying ability, but is assigned a credit limit which is reviewed every 90 days. Orders above the credit limit are accepted only on a cash basis.

- Marginal Customer appears sound, but credit should be extended only on a 30-day basis with a relatively low credit limit. Credit worthiness and credit limit are reevaluated every 90 days.

- Unacceptable Customer does not quality for credit.

Answer each of the following questions and briefly explain where in the statements, notes, or other sections of the annual report you located the information used in your answer.

ANNUAL REPORT OF TOYS \"R\" US Intended for Uise after Chapter 8. In this appendix we present the 1995 annual report of Toys \"R\" Us, a publicly held corporation. This report was selected to illustrate many of the financial reporting concepts discussed in this textbook. But not all of the terminology and accounting policies appearing in this report are consistent with our text discussions. This illustrates some of the diversity that exists in financial reporting. TOSUs ANNUAL REPORT YEAR END ED JANUARY 28. 1 99s

Solution

4. Current ratio= Current assets/Current Liabilities 1995 1994 2530713/2136943= 2708396/2075051= 1.18 1.31 Quick Ratio=(Current assets-Inventory&pre-paid assets)/Current Liabilities (2530713-(1999148+45818))/2136943= (2708396-(1777569+40400))/2075051= 0.23 0.43 Both Current & quick ratios are well below the normal number for these ratios ---of 2 & 1 respectively. Read in combination with the quick ratio , indicates over-stacking of inventory--which is the most illiquid of the current assets--requiring to be sold to be converted to receivables & then to cash. Hence, the company\'s(Toys\" R\" Us) immediate liquidity ,is not recommendable for extending trade credits For every $ of current liability presented, there is only $ 0.23 liquid assets available, with the company. 5… Accounts payable 1339081 1156411 Total current liabilities 2136943 2075051 A/cs.payable/Total current liabilities 62.66% 55.73% Payables Turnover= Net credit purchases/A/cs.payables Credit purchases 6007958 5494766 Paybles T.O. 6007958/1339081= 5494766/1156411= 4.49 4.75 Payables In days 365/4.49= 365/4.75= 81 77 The company already has a heavy balance of accounts payable for purchases ---ie. 63% for the fiscal ended 1995 Secondly, the company takes almost 80 days to settle trade credits So, the credit-extending company has to note the fact that Toys R Us may not meet its obligation in 60 days 6… Possible Credit Ratings: Unacceptable Customer does not quality for credit Reasons: 1. Liquidity position is too very unsatisfactory, as evidenced by current & quick ratios 2.. Credit settlement to the existing suppliers takes longer no.of days